Hungarian deflation data hands dilemma to rate setters

By bne IntelliNews March 11, 2015

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Hungary’s deflation persisted in February, but prices fell less than expected and at a slower rate than in the previous month, the statistics office KSH reported on March 10. Alongside signs that deflationary pressures are subsiding in the EU, the data appears to raise a dilemma for rate setters.

Consumer prices declined 1.0% y/y in February, decelerating from a 1.4% drop the previous month. Analysts were looking for a fall of 1.1-1.2%. On a monthly basis, prices increased 0.5% in February, registering their first rise since July. The improvement was driven mainly by a softer decline in fuel and food prices.

Commenting on the figures, KSH statistician Borbala Minary said that there are "unquestionable" signs that prices are starting to rise, noting core inflation accelerated in February for the first time since January 2014, Dow Jones reported. Core inflation, which excludes volatile food and oil prices, accelerated to 1% y/y in February from 0.8% in January.

The continued fall in Hungary’s CPI over the past few months, has had most analysts expecting the Magyar Nemzeti Bank (MNB) to return to easing this month, with a new inflation report due. The monetary policy council is scheduled to make its next rates decision on March 24.

The MNB has ignored calls for a return to easing since it ended a two-year cycle in July, dropping the benchmark rate to a record-low of 2.1%. However, as prices have continued to sag, the central bank suggested that it might loosen policy further this month. Hungary’s central bankers have largely marched in step with their peers in Poland, who surprised with a 50-basis-point (bp) rate cut on March 4.

However, that could now be in question. On top of February's better-than-expected CPI data, there are signs that deflation in the Eurozone may have reached its peak. One of the main issues seen holding back easing in recent months across Central Europe has been that deflation is largely imported via the Eurozone and oil prices, leaving monetary policy inefficient in pushing it back.

EU core inflation estimates released on March 6 showed a broad-based rise in inflation, note Deutsche Bank analysts. "Assuming commodity prices remain stable, euro area inflation should now have bottomed," they suggest. "Oil-related energy prices — which had fallen every month since August — increased and first petrol price information for March suggests that prices will rise strongly again this month."

Similar pressures have been noted in the Czech Republic, which also saw February inflation outpace expectations, coming in at 0.1%. Yet the Czech National Bank looks unlikely to abandon its easing policy just yet, and some analysts expect the same in Hungary, despite the signs of improvement.

According to KBC, there is no deflationary pressure within the Hungarian economy. In fact, they see strengthening domestic consumption pushing prices the other way. That should put inflation on target to meet the NMB's target of 3% by 2016, it argues.

However, the bank also expects the MNB to stick to its recent guidance and offer a small cut. "Fundamentally, we see no strong argument to start a rate cut cycle recently, but the international sentiment, the ECB’s QE policy, [and] Poland’s rate cut may push the council’s tone towards a 20bp rate cut in March," KBC analysts write.

Hungary’s central bank is then likely to "leave the door open for further rate cuts, to avoid the situation we saw on the Polish market after the [recent] decision," the analysts add, to avoid the risk of the pressures from quantitative easing pushing the forint higher. The Polish decision was accompanied by a definite declaration that easing is now over. That pushed the zloty to stronger levels, despite the bigger than expected cut.

Yet others suggest the ultra-loose policy could be coming to an end, and the Hungarian decision later this month may be a prime test in the wake of the imprived inflation data.

"The theme of monetary easing, which has dominated market performance in Central Europe for last three years, is coming to an end," suggest analysts at Citigroup. "We see several reasons why markets may soon start paying more attention to a still underappreciated risk of policy tightening. Economic growth in recent quarters in CEE has been stronger than initially expected, despite unfavourable external shocks. Now the German growth outlook is becoming more positive the region is likely to show signs of further recovery.  Disinflation trend looks set to turn around and a mix of strong base effects and robust domestic demand may push CPI substantially higher."

"Current levels of the IRS [interest rate swap] curve imply a very optimistic (possibly too optimistic) scenario in CEE rate markets," they argue. "We are particularly concerned with stability in the long-end of the Hungarian curve."

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